ETNs in Oval: how exactly do they work?
4 min read
This year Oval has celebrated 3 years since its launch and just over one year since the start of its marketplace of investment products. Our mission has always been to bring access to great products to our users starting from an investment of just 10€. We now want to help our investors get more familiar with our products, by furthering our explanation of what ETNs are, how they work, and how the protection on these investments works.
In financial markets, if you want to buy shares of a company, for example Apple, or even ETFs you need to open a brokerage account with your bank and then place an order. The broker will buy for you at the market price and the bank will then “hold” in custody, acting as custodian. This is because shares or ETFs traded in the market are bearer instruments, they are not registered in your name but yours just because held for you in custody.
The ETNs available on the Oval app are registered instruments, meaning that every time you invest, your position in an ETN is held within a third party registrar that makes sure that ownership is preserved. In this way, you are eliminating the high costs of depositing and custody for your share in the ETN.
How do ETNs work?
Exchange-Traded Notes (ETNs) are a type of unsecured debt security that tracks an underlying index of securities. ETNs can trade on a major exchange like a stock, or on Oval you can buy and sell them directly on a daily basis and make money from the difference between the purchase and sale prices, minus the applied fee. The fee is 1% annual calculated on a daily basis.
SmartETN, the Issuer of the financial products available on the Oval app (Invest with Pride, Protect Water, etc) is a Special Purpose Vehicle (SPV) domiciled in Ireland and authorised to issue certificates to the public by the Central Bank of Ireland under its 2,000,000,000 EUR Structured Medium Term Certificate Programme.
SmartETN, according to its Base Prospectus (available for consultation at the website www.smartetn.com), is allowed to use the proceedings of the issuances of certificates to enter into offsetting transactions in order to hedge its own liabilities.
In order to match its liabilities SmartETN is allowed to buy assets. In the case of FixedRate, such assets include but are not limited to government bonds, corporate bonds, corporate loans and trade receivables. For all the other indices these match exactly the composition of the index shown in the app. This means that the assets should always match the liabilities bringing the product to repay its commitments by design.
SmartETN products are guaranteed by Cirdan Capital Management Ltd, an asset manager authorized by the Financial Conduct Authority, FCA, (number 744446) (Cirdan). This means that if, for whatever reason, the products as designed are unable to meet repayment obligations, Cirdan will cover any and all shortfalls.
Please note that because the product is an investment and is therefore subject to market volatility, it can give negative equity. This is not the same as the product failing to meet its repayment obligations and you will not receive compensation just because your investments perform badly (performance risk).
Are ETNs protected?
The ETNs on the Oval marketplace are not covered by FSCS protection. The FSCS, is the UK’s independent statutory fund which protects customers of financial services firms that have failed.
FSCS protection is only offered in case of authorized financial advice, which means only if the ETNs have been recommended to you by a financial advisor who acted negligently and you must have lost money after acting on the advice you were given.
This is different from market risk. Investing in ETNs always carries some market risk and the risk level is defined by the SRRI of each product as shown in the app (the higher risk level, the higher the chance you can lose your money). This helps both to match your investment to your risk appetite and to diversify between products with different risk levels. Diversification is a technique that can help reduce risk by allocating investments among various financial products.
However, in case of SmartETN, its payment obligations in respect of its products are unconditionally and irrevocably guaranteed by Cirdan Capital Management, an investment firm regulated by the FCA. If SmartETN is unable to make any payments, they will fall to be made by Cirdan.
In the light of transparency we hope this clears a lot of questions on our products and gives you more security on the fact that they are designed in the best interest of our users, making them accessible starting from 10€ (100€ for FixedRate) and easily available to buy and sell on a now daily basis (during business days).
Your capital is at risk and past performance may not be a real indicator of future results. Oval Money is not authorized to provide financial advice, expert advice is recommended if you have further questions.